Capital account liberalization and sudden stops in global capital flows

Jia Hao and Weining Wang

International Review of Economics & Finance, 2025, vol. 98, issue C

Abstract: Using the annual panel data of 47 economies from 1999 to 2020, this study adopts the probit model for empirical analysis and examines the impact of capital account opening on sudden stops from the dual perspectives of institutional quality and macroprudential policies. We further examine the impact of capital account liberalization on the sudden stop of different types of capital flows. Results indicate that capital account liberalization is positively associated with sudden stops. Moreover, improved institutional quality and stronger macroprudential policies mitigate the negative impact of capital account opening on sudden stops. Finally, from the perspective of different types of capital flows, the opening up of capital account leads to sudden stops in direct investment, portfolio investment, and other investment flows. Thus, as China gradually liberalizes its capital account, it should enhance institutional quality and strengthen macroprudential policies to effectively mitigate the impact of sudden stops on economic growth and financial stability.

Keywords: Capital account openness; Sudden stop; Institutional quality; Macroprudential policy; Probit model (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:98:y:2025:i:c:s1059056025001170

DOI: 10.1016/j.iref.2025.103954

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